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Palomar had one transaction with Vesttoo, says CEO
Palomar Holdings, which has a Bermuda reinsurance subsidiary, said its exposure to the Vesttoo scandal was limited to a single counterparty and is immaterial, its chief executive officer said.
Mac Armstrong, who is chairman and CEO, added the California insurer may benefit from the scandal, saying it had been approached by several managing general agencies looking for a fronting partner.
Vesttoo revealed last month that at least two collateralised transactions between insurers and investors had been called into question after investor’s letters of credit turned out to be fraudulent.
The scandal has raised doubts about the amount of capacity available for collateralised insurance transactions.
Armstrong said: “We closely manage the compliance oversight, reinsurance and collateral of our seven fronting partners. This is a focus and strategic approach. We maintain a risk participation on selected partners with the current maximum participation of 5%.
“Our approach has allowed us to quickly assess and limit our counterparty exposure to potentially fraudulent letters of credit and transactions arranged by Vesttoo. Fortunately, our exposure is limited to a single counterparty and is immaterial.”
He added: “It’s probably a net positive for Palomar because, first and foremost, we are an underwriting organization. We are already seeing submissions from programme submissions from MGAs that are looking for potentially a new fronting partner.
We are also seeking potentially more stable fronting partners. We have also seen submission flow uptick in a few Casualty lines from MGAs back or rather renewals coming away from MGAs that have potential collateral exposure to us just in the open market with our casualty segment.”
Armstrong elaborated that the transaction was a past treaty transaction that had expired, adding: “We are looking at just what’s in trust and what would be our exposure if it goes beyond trust.
“If it goes beyond the trust, which we have full control of, that’s where our exposure would be, and again, it’s immaterial. For everything that’s in place right now, Vesttoo, there’s nothing -- Vesttoo is not an issue, they are not a reinsurer.”
Armstrong made the comments after Palomar reported its net income for the second quarter rose 20.5% as it increased gross written premiums despite a challenging reinsurance environment.
Palomar said GWP rose 25.4% to $274.3 million while losses rose 24.4% to $17.9 million. The combined ratio increased to 72.2% from 69.1% as underwriting income dropped to $17.4 million from $20 million in 2022.
Armstrong said: said: “Our team successfully executed our Palomar 2X strategy of profitable growth despite the elevated catastrophe activity and the historically hard reinsurance market that has significantly impacted the insurance industry.
“In the quarter, we focused our capital and resources towards targeted segments of our book of business, such as earthquake, inland marine, and casualty to maximize our risk-adjusted returns while we continued to reduce exposure to segments of our book that add volatility to our results. This prudent approach resulted in gross written premium growth of 25% and, importantly, an adjusted return on equity of 21.3%.”
He added: “Beyond the strong financial results, the quarter featured several noteworthy accomplishments that position us well for near and long-term success. We effectively placed our June 1 reinsurance programme in line with our expectations and subsequently raised our adjusted net income guidance for the full year.
“We also hired a team of professional liability underwriters to expand the expertise within our casualty franchise, and, in July, we received a “positive outlook” from A.M Best. On the heels of this quarter, we are further raising our adjusted net income guidance range to $89 million to $93 million for 2023.”
Investment results rose by 76.5% to $5.5 million due to higher yields on investments and net realised and unrealised gains of $1.1 million compared to a loss of $4.7 million.